Liberalisation and capital market performance: lessons from the Enron affair

Abstract

We discuss the consequences of liberalization on capital market performance. Greater autonomy is expected to bring efficiency, profit and augmented welfare. In some cases, this higher autonomy has also been connected to episodes of fraud. We discuss the role a regulatory activity can play into such a scenario. In order to do it, we focus on factors such as volatility and performance of capital markets, and we analyze the hypothesis that the capital markets' functioning is conditioned by the regulatory activity. We analyze firms' strategies by studying the specific case of Enron. This analysis allowed us to relate firms' behaviour, motivation and strategies with the necessity of a regulatory process on capital markets, in order to achieve an environment of confidence where the market can fulfil its objectives. Our results point out for the existence of a positive relationship between our proxy of the regulatory activity and the level of stock market index. Our results also pointed out for the existence of a negative relationship between the conditional volatility modelled by GARCH models and the growth rate of that regulatory index. The use of autoregressive process had the objective to include in the model the expectations formed in the capital market in previous periods.